What Is A Stop Loss?

A stop-loss is the most important tool in your trading survival kit.

Not all trades are going to be winners. You need to prepare yourself mentally for that. You are going to lose money sometimes. Maybe often.

It doesn't matter though, if you win more than you lose.

In one sentence, all other nonsense removed, that is the aim of the game - win more than you lose.

Because as I said, you are going to lose. This is important. Have I stressed this enough yet? :-)

When you open a trade and the price starts to go against you, the question is always "do I get out now, or is it going to come back?"

And the answer is always "it's going to come back" :-) Because we hate to lose, we hate to lose money, and we hate to admit we made a mistake.

But there has to be a point where you concede you made a mistake. This is a price that you have worked out before entering the trade. How this price is calculated will be talked about later.

What's important is that you have the entry price X, the stop loss price Y, and that you tell your broker both of these when you open the trade.

The stop loss should definitely not be just tucked away in your head. You don't want to wake up in the morning and find that the price has gone well past your mental stop loss.

So if the price does keep going in the wrong direction, while you are saying "it's going to come back", your broker will automatically execute the stop loss when it reaches the price you specified.

It's a method of enforced trading discipline. Emotions are going to muck with you, and we just got around the problem of staying in a losing trade too long.

Never move a stop loss to where it would be risking more money. Stop losses can be moved in order to lock in profit, or to risk less, but never to risk more.